Music download prices could be going up

The record labels are considering raising the price of music downloads. Will …

Since the launch of the iTunes Music Store in 2003, online music sales have skyrocketed. That success is due primarily to two factors: digital rights management that many users can live with, and the 99¢ per track song price. It doesn't look like DRM is going anywhere soon, but that 99¢ price may not be around for too much longer if some record companies get their way.

We've been down this road before — a similar increase was rumored last spring, but never appeared. Apparently the record labels have never heard the story of the goose that laid the golden egg. Spurred by the increase in online sales, some of the Big 5 labels are contemplating increasing the wholesale price charged to the music stores for each song. The labels have engaged in preliminary negotiations with some of the stores — including iTMS and Napster — about a price increase. Predictably, the stores are quite cool to the idea. They would have to either eat the additional cost and erode their margins or pass the extra on to consumers, neither of which is an attractive choice.

Another factor that could be playing into a possible price increase is the success of Apple. That company controls about 65 percent of the digital music player market according to recent market research figures, and at least 70 percent of online sales. And as everyone is no doubt aware, the Apple music universe is a self-contained one: one DRM, one digital music player, and no compatibility with other services or players. Does the industry fear Apple? One industry insider remarked that their music was "not something to be given away to sell iPods."

According to industry sources, the current wholesale per-track price of around 65¢ was set at that "low" price to stimulate demand. The question the recording industry needs to think long and hard about prior to raising prices is whether demand for legal downloads would decrease and by how much. If songs were $1.29 per track, would that give consumers pause before pressing "Buy Now"?

A price increase would be especially hard to swallow given that CD prices have not fallen significantly. While the music industry has in the past promised lower prices, they have yet to deliver. Those of you who can remember when CDs first came out will recall that the labels told us that the high prices were necessary due to the high costs of manufacture. 20 years later, manufacturing is a fraction of what it used to be, and prices have dropped little. With online sales, the cost to labels is even less — no physical product, no distribution, no warehousing — yet they threaten a price increase.

Part of the reason online music sales had such a hard time getting off the ground was consumer expectations around pricing. For better or worse, those expectations were formed by Napster in the late 1990s: music should be cheap, freely available, and unbound by DRM. The introduction of iTMS (along with some lawsuits) demonstrated that consumer behavior would change if there was an acceptable alternative to piracy. Now that consumers' purchasing habits have been formed by 99¢ downloads, the labels face the very likely possibility that consumers will thumb their noses at higher prices and seek out other alternatives. Is it extracting higher prices from what amounts to around 2 percent of your audience worth what it could cost? For the record cartel, it may be.